Is Middlesex Water Company's (NASDAQ:MSEX) Balance Sheet Strong Enough To Weather A Storm?
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Middlesex Water Company (NASDAQ:MSEX) is a small-cap stock with a market capitalization of US$998m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into MSEX here.
Does MSEX Produce Much Cash Relative To Its Debt?
MSEX has built up its total debt levels in the last twelve months, from US$175m to US$222m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$5.0m , ready to be used for running the business. Additionally, MSEX has generated US$45m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 20%, indicating that MSEX’s operating cash is sufficient to cover its debt.
Can MSEX meet its short-term obligations with the cash in hand?
With current liabilities at US$93m, the company may not be able to easily meet these obligations given the level of current assets of US$30m, with a current ratio of 0.32x. The current ratio is the number you get when you divide current assets by current liabilities.
Is MSEX’s debt level acceptable?
MSEX is a relatively highly levered company with a debt-to-equity of 87%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether MSEX is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MSEX's, case, the ratio of 5.05x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MSEX ample headroom to grow its debt facilities.
Next Steps:
Although MSEX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure MSEX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Middlesex Water to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MSEX’s future growth? Take a look at our free research report of analyst consensus for MSEX’s outlook.
Historical Performance: What has MSEX's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
